Industrial Reits Definition Examples How It Works

Industrial REITs Definition

How Does it Work?

Industrial REITs buy spaces or build up spaces that can be leased or rented to businesses for industrial, specifically industrial purposes. Such REITs form a pool of funds that helps their business for investment purposes. REITs collect funding through contributions from either retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more

or businesses. These funds are then used to either purchase buildings, industrial hubs (in part or in full), industrial spaces, factories, production centers, etc. or manage, pre-owned, or leased, such industrial properties so that it can be further leased to collect money.

They work on a business model that demands higher dividends to be paid to the investors. These REITs are exempt from federal income taxFederal Income TaxFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more so long as they give 90% of their taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation.read more in dividends to shareholders. Investors also have the incentives of capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more because of rising real estate property rates.

Industrial REITs, like other REITs, issue sharesIssue SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more for equity funding along with corporate-level debt funding. Thus, unlike traditional real estate investment trusts, these funds also trade in public exchange markets.

The Investors’ Perspective

It is important to note that REITs, including industrial, make long-term investmentsLong-term InvestmentsLong Term Investments are financial instruments such as stocks, bonds, cash, or real estate assets that a company intends to hold for more than 365 days in order to maximize profits and are reported on the asset side of the balance sheet under the heading non-current assets.read more into properties. Hence, any decision or plan to invest money into such funds should incorporate the long-term view of investments.Investment decisions in these REITs should be based on the assessment of the operations of the businessOperations Of The BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. The dividend yieldDividend YieldDividend yield ratio is the ratio of a company’s current dividend to its current share price. It represents the potential return on investment for a given stock.read more is one of the best measurement tools, and the same can be calculated by dividing the dividends by the cash flow from operationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more. A higher ratio indicates better returns.Always look for REITs that have performed well historically. A good performing REIT is sure to have a strong team that usually presents opportunities for good performance in the future.Before making investments, consider understanding the market dynamicsMarket DynamicsMarket Dynamics is defined as the forces of market constituents responsible for the shift in the demand and supply curve and are therefore accountable for creating and reducing the demand and supply of a particular product.read more, macroeconomic environment in which the REITs operate, and the risk-return profile of the investment.

Examples of Industrial REITs

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In the United States market, industrial REITs account for approximately 10% of the broad-based real estate exchange-traded funds. Some of the popular REITs in the industrial sector are:

Liberty (LPT)Prologis (PLD)Americold (COLD)PS Business Parks (PSB)EastGroup (EGP)STAG Industrial (STAG)Innovative Industrial (IIPR)

Some of the highest dividend-paying industrial REITs are:

Uniti Group, Inc.Plymouth Industrial RIET, Inc.Industrial Logistics Properties Trust

These REITs have dividend yields of over 7% each.

Different REITs have different specifications for property management. Some such REITs own/manage production facilities while others own/manage warehouses or distribution centers.

Let us look at some of the well-known industrial REITs quickly:

Prologis falls under the logistics sub-category of these REITs. It is one of the largest and highest-rated (based on creditworthinessCreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new loan.read more) REITs and manages warehouses and distribution centers. It has a market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of almost $50 billion and a dividend yield of 2.9%.

Another important player in the industrial space is the Stag industrial REIT, which has logistics and manufacturing spaces. It mostly operates in the United States and is a smaller player. It gave a dividend yield of 4.9% while holding $3.5 billion in market capitalization.

Duke Realty Corporation, U.S. based, is a different REIT which focuses on distribution centers and medical offices. Its market capitalization stands at $10.9 billion and dividend yield at 2.8%.

Advantages

Flexibility in managing industrial spaces and modifying them as per the specific needs of businesses or clients comes as an advantage. Thus, adaptability becomes an important consideration in industrial REIT.On a similar note, they have to focus less on repairs and aesthetics of the building and properties. Other REITs face this problem due to the aesthetic value of the property.Investments in these REITs can be advantages as there has been a dearth of logistics spaces while more and more manufacturing activity is coming on the plate.

Disadvantages

The growth factors are heavily reliant on economic conditions. More often than not, constantly changing macro conditions cause volatility in these REITs. One such macroeconomic factorMacroeconomic FactorMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read more is the interest rate.These REITs have a short-term nature of leasing. This means that they lease for a shorter term as compared to other real estate properties, and therefore, it affects the growth opportunities associated with REITs.They are challenging to set up and thus pave the way for barriers to entryBarriers To EntryBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more. Huge investment in REITs, particularly industrial, causes very few players to enter or sustain the competition.Industrial REITs can be subject to the risks of oversupply. During economic prosperity, industrial progress is a given, and this tends to adversely affect the demand-supply profile.

Conclusion

Until the end of the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more the REITs saw strong leasing spreads and pushed rent growth quite impressively. Occupancy levels also increased to a record high despite high growth in rents. The two most important factors for this REIT growth have been the performance of industrial stocks and the demand-supply profile of industrial spaces.

It should be noted that these REITs run risk related to financing since they rely heavily on money that has been borrowed from corporates or investors. Increasing interest rates can cause damage to such REITs and deteriorate their margins.